Callaway 2006 Annual Report Download

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CALLAWAY GOLF COMPANY 2006 ANNUAL REPORT

Table of contents

  • Page 1
    CALLAWAY GOLF COMPANY 2006 ANNUAL REPORT

  • Page 2

  • Page 3
    ...a golf shop in the Southern California desert and fell in love with a hickory-shafted replica of a wedge not unlike those he had grown up playing back home in Georgia. As the story goes, he liked it so much he bought the company. A decade later Ely Callaway introduced the world to a golf club unlike...

  • Page 4
    ...Public Relations facets of our business. They bring a refreshing perspective to our Company and give us a corporate leadership group that is without peer. Our professional tour staff is also a big part of our team. In many ways, they are the public face of the more than 3,000 Callaway Golf employees...

  • Page 5
    ...Callaway Golf drivers in his bag. Annika Sorenstam won three times, including her second U.S. Women's Open, had five second-place finishes and won more than $1.9 million. In 2007 we signed Ernie Els, who has established both a career and character that aligns perfectly with the Callaway Golf brand...

  • Page 6
    ... Callaway Golf and our vast network of authorized U.S. retailers that provides a new level of service, security and convenience for online consumers. Despite the significant progress we've made as a company, we recognize that we still have work to do. The underperformance of our Top-Flite brand...

  • Page 7
    ...products make the list. Our Editors' Choice products were the new FT-5 Driver, Big Bertha Fairway Woods, X-20 Irons, HX Hot Golf Balls and Odyssey White Hot XG 2-Ball SRT Putter. Gold Medal winners included the FT-i Driver, X Hybrids, X-Forged Irons, X-Tour Wedges and the HX Tour and HX Tour 56 Golf...

  • Page 8
    ...Fellows President, Chief Executive Officer and Director Board of Directors Senior Management Samuel H. Armacost Chairman, SRI International Christopher O. Carroll Senior Vice President, Human Resources Ronald S. Beard Chairman and Lead Independent Director Partner, Zeughauser Group LLC; Retired...

  • Page 9
    ... Accounting Firm The 2007 Annual Meeting of Shareholders Tuesday June 5, 2007 Callaway Golf Company 2180 Rutherford Road Carlsbad, CA 92008 760.931.1771 For more information visit the company's websites: Deloitte & Touche LLP 695 Town Center Drive, Suite 1200 Costa Mesa, CA 92626 Transfer Agent...

  • Page 10
    ... including statements relating to future growth, profitability, the re-launch of the Top-Flite brand, the timing or amount of savings to be realized from the Company's gross margin initiatives, market acceptance or success of new products, the elimination of supply chain issues and the returning to...

  • Page 11

  • Page 12

  • Page 13
    ...931-1771 (Address, including zip code, and telephone number, including area code, of principal executive offices) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $.01 par value per share New York Stock Exchange...

  • Page 14
    ...-Great Big Bertha-Heavenwood-Hogan-Hybrid 45-HX-HX Tour- I-Trax-Little Ben-Marksman-Molitor-Number One Putter in Golf-Odyssey-ORG.14-Pencil-Rossie-S2H2-SRT-SenSert-Speed Slot-Steelhead- Strata-Stronomic-Sure-Out-T design-Tech Series-Top-Flite-Top Flite D2-Top-Flite XL-Tour Authentic--Tour Deep-Trade...

  • Page 15
    ..., Executive Officers and Corporate Governance ...Executive Compensation ...Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters ...Certain Relationships, Related Transactions and Director Independence ...Principal Accountant Fees and Services ...PART IV...

  • Page 16
    [THIS PAGE INTENTIONALLY LEFT BLANK]

  • Page 17
    ... sells high quality golf clubs (drivers, fairway woods, hybrids, irons, wedges and putters) and golf balls. The Company also sells golf accessories such as golf bags, golf gloves, golf headwear, golf footwear, golf towels and golf umbrellas. The Company generally sells its products to golf retailers...

  • Page 18
    ...product group are described below: Drivers and Fairway Woods. This product category includes sales of the Company's drivers, fairway woods and hybrid products, which are sold under the Callaway Golf, Ben Hogan and Top-Flite brands. These products are generally made of metal (either titanium or steel...

  • Page 19
    ... of new golf clubs and golf balls. For certain risks associated with product design and development, see below, "Certain Factors Affecting Callaway Golf Company" contained in Item 1A. Manufacturing Golf Clubs The Company's drivers, fairway woods, hybrids, irons, wedges and putters are assembled...

  • Page 20
    ... the consolidation of the Callaway Golf, Top-Flite, Ben Hogan and Odyssey selling functions. Sales of the Company's products in the United States are made and supported by fulltime regional field representatives and in-house sales and customer service representatives who are employees of the Company...

  • Page 21
    ... by the Company. This new website is also accessible via the Company's main website, www.CallawayGolf.com. The website offers the full line of official Callaway Golf and Odyssey products, including drivers, fairway woods, hybrids, irons, golf balls, footwear, eyewear, apparel and accessories. 5

  • Page 22
    ... The golf club markets in which the Company competes are highly competitive, and are served by a number of well-established and well-financed companies with recognized brand names, as well as new companies with popular products. With respect to drivers, fairway woods and irons, the Company...

  • Page 23
    ... use on products such as golf apparel, watches, travel gear and eyewear. The Company has a current licensing arrangement with Ashworth, Inc. for a complete line of Callaway Golf men's and women's apparel for distribution in the United States, Canada, Europe, Australia, New Zealand and South Africa...

  • Page 24
    ... had approximately 3,000 full-time employees. In addition, the Company employs part-time employees and temporary employees as the business requires. Historically, Callaway Golf employees have not been represented by unions. The Top-Flite manufacturing employees in Chicopee, Massachusetts, however...

  • Page 25
    .... The rapid introduction of new golf club or golf ball products by the Company has resulted in closeouts of existing inventories at both the wholesale and retail levels. Such closeouts have resulted in reduced margins on the sale of older products, as well as reduced sales of new products, given the...

  • Page 26
    ... to transition to other suppliers, the Company could experience significant production delays or disruption to its business. The Company also depends on a single or a limited number of suppliers for the materials it uses to make its golf balls. Many of these materials are customized for the Company...

  • Page 27
    ...Company uses to build its golf clubs, including clubheads and shafts, are shipped to the Company via air carrier and ship services. If there were any significant interruption in such services, the Company may be unable to engage alternative suppliers to deliver its products or components in a timely...

  • Page 28
    ... are diverted from golf and become focused on issues relating to these events. If such events disrupt domestic or international air, ground or sea shipments, the Company's ability to obtain the materials necessary to produce and sell its products and to deliver customer orders would be harmed...

  • Page 29
    ...'s sell-in to the golf retail channel of its golf club products for the new golf season. Orders for many of these sales are received during the fourth quarter of the prior year. The Company's second and third quarter sales generally represent re-order business for golf clubs. Sales of golf clubs...

  • Page 30
    ... to develop new products. The Company's sales could decline if professional golfers do not endorse or use the Company's products. The Company establishes relationships with professional golfers in order to evaluate and promote Callaway Golf, Odyssey, Top-Flite and Ben Hogan branded products. The...

  • Page 31
    ... the Company's authorized distribution channels and harm the Company's reputation. Some of the Company's products find their way to unapproved outlets or distribution channels. This "gray market" for the Company's products can undermine authorized retailers and foreign wholesale distributors who 15

  • Page 32
    ... markets in Europe, Asia, North America and elsewhere around the world. These activities have resulted and will continue to result in investments in inventory, accounts receivable, employees, corporate infrastructure and facilities. In addition, there are a limited number of suppliers of golf club...

  • Page 33
    ... and a manufacturing plant in Gloversville, New York comprising approximately 70,000 square feet. In addition, the Company owns and leases a number of other properties domestically and internationally, including properties in Australia, Canada, Japan, Korea, the United Kingdom and China. The Company...

  • Page 34
    ...the Company's consolidated annual results of operations, cash flows or financial position. Item 4. Submission of Matters to a Vote of Security Holders None. Executive Officers of the Registrant Biographical information concerning the Company's executive officers is set forth below. Name Age Position...

  • Page 35
    ...Committee. Mr. Fellows graduated with a B.S. degree from City College of New York, received an MBA from Columbia University and completed the Harvard Advanced Management Program. Steven C. McCracken is Senior Executive Vice President, Chief Administrative Officer and Secretary of the Company and has...

  • Page 36
    ... traded, on the New York Stock Exchange ("NYSE"). The Company's symbol for its Common Stock is "ELY." As of January 31, 2007, the approximate number of holders of record of the Company's Common Stock was 8,800. The following table sets forth the range of high and low per share closing prices...

  • Page 37
    ... of Callaway Golf Company Common Stock on December 31, 2001, 2002, 2003, 2004, 2005 and December 30, 2006 of $19.15, $13.25, $16.85, $13.50, $13.84 and $14.41 respectively. Securities Authorized for Issuance Under Equity Compensation Plans The following table provides information about the number of...

  • Page 38
    ... to non-executive officer employees and consultants of the Company. Although the 1995 Plan permitted stock option grants to be made at less than the fair market value of the Company's Common Stock on the date of grant, the Company's practice was to generally grant stock options at exercise prices...

  • Page 39
    ... include the recognition of certain integration charges related to the consolidation of its Callaway Golf and Top-Flite golf ball and golf club manufacturing as well as research and development operations. These charges reduced the Company's gross profit, net income and earnings per common share by...

  • Page 40
    ... financial statements: Revenue Recognition Sales are recognized in accordance with Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial Statements," as products are shipped to customers, net of an allowance for sales returns and sales programs. The criteria for recognition...

  • Page 41
    ... time the sale is recorded. In estimating its future warranty obligations, the Company considers various relevant factors, including the Company's stated warranty policies and practices, the historical frequency of claims, and the cost to replace or repair its products under warranty. If the number...

  • Page 42
    ... Callaway Golf's trademarks through licensing agreements. In early 2006, TGG informed the Company that it was having financial difficulty. The Company acquired the TGG assets to ensure the continued flow of product and the fulfillment of orders. The Company now designs and sells footwear directly...

  • Page 43
    ... May 28, 2004. The Company acquired FrogTrader to stimulate purchases of new clubs by growing the Trade In! Trade Up! program and to enable the Company to better manage the distribution of pre-owned golf clubs and the Callaway Golf brand. The FrogTrader acquisition was accounted for as a purchase in...

  • Page 44
    ...ended December 31, 2005. The overall increase in net sales during 2006 was due to a 9% increase in sales of the Callaway Golf and Odyssey branded products partially offset by a 31% decline in sales of the Top-Flite and Ben Hogan branded products. The Company is in the process of implementing several...

  • Page 45
    ... increases were partially offset by a reduction in average selling price of the Company's older Ben Hogan and Callaway Golf brand driver and fairway woods products. The increase in units sold is primarily due to the launch of steel fairway woods and multi-material hybrid clubs during 2006 as well...

  • Page 46
    ... equipment market due to unfavorable weather conditions in that region and the World Cup soccer event, which reduced traffic in golf retail stores, as well as a decline in Top-Flite and Ben Hogan sales. The Company's 2006 net sales were also positively affected by changes in foreign currency rates...

  • Page 47
    ... offset by a $16.6 million (7%) decrease in sales of golf balls due to a decline in Top-Flite golf ball sales during the year. The overall increase in net sales during 2005 is generally attributable to favorable consumer acceptance of the Company's Callaway Golf and Odyssey products launched...

  • Page 48
    ... almost entirely offset by lower average selling prices in 2005 compared to the prior year. The majority of this increase related to sales of the Company's new 2005 products including new Callaway titanium drivers, multi-material driver and fairway woods products and hybrid woods products as well...

  • Page 49
    ... product mix and the impact of favorable changes in foreign exchange rates partially offset by a decline in average selling prices of some of the Company's driver and fairway woods products. The increase in gross profit was partially offset by charges of $6.4 million related to the Top-Flite...

  • Page 50
    ... under employee benefit plans during the period. These financing cash inflows were partially offset by $52.9 million of cash paid for the acquisition of stock under the November 2005 and June 2006 repurchase programs and $19.2 million of dividends paid during the period. The Company's net accounts...

  • Page 51
    ...includes pre-launch inventory levels of the Company's new irons products as well as higher levels of putters and accessories associated with 2007 product launches. As part of the Company's gross margin initiatives, the Company plans to review component lead times as well as its internal supply chain...

  • Page 52
    ...assumed as part of the Top-Flite Acquisition. (2) During the normal course of its business, the Company enters into agreements to purchase goods and services, including purchase commitments for production materials, endorsement agreements with professional golfers and other endorsers, employment and...

  • Page 53
    ... to manage electricity costs in the volatile California energy market. The contract was originally effective through May 2006. During the fourth quarter of 2001, the Company notified the energy supplier that, among other things, the energy supplier was in default of the energy supply contract and...

  • Page 54
    ... contracts used to hedge them, thereby reducing volatility of earnings. The Company does not enter into any trading or speculative positions with regard to foreign currency related derivative instruments. The Company is exposed to foreign currency exchange rate risk inherent primarily in its sales...

  • Page 55
    ... exchange contracts designated as cash flow hedges. As part of the Company's risk management procedure, a sensitivity analysis model is used to measure the potential loss in future earnings of market-sensitive instruments resulting from one or more selected hypothetical changes in interest rates or...

  • Page 56
    ... of the Company's internal control over financial reporting as of December 31, 2006. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in its report entitled Internal Control-Integrated Framework. Based...

  • Page 57
    Management's assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2006 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in its report which is included herein. Item 9B. Other Information ...

  • Page 58
    ... Registered Public Accounting Firm To the Board of Directors and Shareholders of Callaway Golf Company Carlsbad, California We have audited management's assessment, included in the accompanying Management's Report on Internal Control over Financial Reporting, appearing in Item 9A, that Callaway Golf...

  • Page 59
    ... maintains employee benefit plans and programs in which its executive officers are participants. Copies of certain of these plans and programs are set forth or incorporated by reference as Exhibits to this report. Information required by Item 11 will be included in the Company's definitive Proxy...

  • Page 60
    .... All such requests should be directed to the Company's Investor Relations Department at Callaway Golf Company, 2180 Rutherford Road, Carlsbad, CA 92008. 3.1 Certificate of Incorporation, incorporated herein by this reference to Exhibit 3.1 to the Company's Current Report on Form 8-K, as filed with...

  • Page 61
    ... to the Company's Annual Report on Form 10-K for the year ended December 31, 2004, as filed with the Commission on March 10, 2005 (file no. 1-10962). Form of Non-Employee Director Restricted Stock Unit Grant Agreement. †Callaway Golf Company 2004 Equity Incentive Plan, incorporated herein by this...

  • Page 62
    ... with the Commission on June 9, 2006 (file no. 1-10962). Callaway Golf Company Non-Employee Directors Stock Option Plan (as amended and restated August 15, 2000), incorporated herein by this reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001...

  • Page 63
    ...'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, as filed with the Commission on August 16, 1999 (file no. 1-10962). Other Contracts 10.29 10.30 10.31 10.32 Third Amendment to Amended and Restated Credit Agreement dated as of February 15, 2007 by and among Callaway Golf...

  • Page 64
    ... by this reference to Exhibit 10.50 to the Company's Annual Report on Form 10-K for the year ended December 31, 2004...benefit of participating employees, incorporated herein by this reference to Exhibit 10.45 to the corresponding exhibit to the Company's Quarterly Report on Form 10-Q for the quarter...

  • Page 65
    ... duly authorized. CALLAWAY GOLF COMPANY By: /S/ GEORGE FELLOWS George Fellows President and Chief Executive Officer Date: February 27, 2007 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and...

  • Page 66
    ... summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ GEORGE FELLOWS George Fellows President and Chief Executive Officer Date...

  • Page 67
    ... information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ BRADLEY J. HOLIDAY Bradley J. Holiday Senior Executive Vice President and Chief Financial Officer...

  • Page 68
    ... adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of Callaway Golf Company, a Delaware corporation (the "Company"), does hereby certify with respect to the Annual Report of the Company on Form 10-K for the year ended December 31, 2006, as filed with...

  • Page 69
    INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets as of December 31, 2006 and 2005 ...Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004 ...Consolidated ...

  • Page 70
    ... Registered Public Accounting Firm To the Board of Directors and Shareholders of Callaway Golf Company Carlsbad, California We have audited the accompanying consolidated balance sheets of Callaway Golf Company and subsidiaries (the "Company") as of December 31, 2006 and 2005, and the related...

  • Page 71
    ... assets ...Property, plant and equipment, net ...Intangible assets, net ...Goodwill ...Deferred taxes ...Other assets ...LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses ...Accrued employee compensation and benefits ...Accrued warranty expense ...Bank...

  • Page 72
    CALLAWAY GOLF COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) Year Ended December 31, 2006 2005 2004 Net sales ...Cost of sales ...Gross profit ...Selling expenses ...General and administrative expenses ...Research and development expenses ...Total operating ...

  • Page 73
    ...) 7,583 1,554 Accounts payable and accrued expenses ...(4,525) 32,423 (17,122) Accrued employee compensation and benefits ...(6,376) 5,121 (5,895) Accrued warranty expense ...98 1,224... golf related ventures ...Proceeds from sale of capital assets ...Acquisitions, net of cash acquired ...Net cash used...

  • Page 74
    CALLAWAY GOLF COMPANY CONSOLIDATED......Employee stock purchase plan . . Cash dividends ...Adjustment of Grantor Stock Trust shares to market value . . Equity adjustment from foreign currency translation ...Net ... $577,117 The accompanying notes are an integral part of these financial statements. F-6

  • Page 75
    ... and sells high quality golf clubs (drivers, fairway woods, hybrids, irons, wedges and putters) and golf balls. The Company also sells golf accessories such as footwear, golf bags, golf gloves, golf headwear, golf towels and golf umbrellas. The Company generally sells its products to golf retailers...

  • Page 76
    ... at the time the sale is recorded. In estimating its future warranty obligations, the Company considers various relevant factors, including the Company's stated warranty policies and practices, the historical frequency of claims, and the cost to replace or repair its products under warranty. The...

  • Page 77
    ... the Employee Stock Purchase Plan and Restricted Stock grants to employees and non-employees (see Note 12). Dilutive securities related to the Callaway Golf Company Grantor Stock Trust and the Company's stock option plans are included in the calculation of diluted earnings per common share using the...

  • Page 78
    ...-line method over the remaining estimated useful lives. Costs such as maintenance and training are expensed as incurred. In connection with the consolidation of Callaway Golf and Top-Flite golf club and golf ball manufacturing and research and development operations, the Company disposed of certain...

  • Page 79
    ... assets consist of goodwill, trade names, trademarks, service marks, trade dress, patents and other intangible assets acquired during the acquisition of Odyssey Sports, Inc., the Top-Flite assets, FrogTrader, Inc., the Tour Golf Group assets and certain foreign distributors. See Note 4 for further...

  • Page 80
    CALLAWAY GOLF COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) value is determined based on the closing price of the Company's Common Stock on the award date multiplied by the number of awards expected to vest. The number of awards expected to vest is based on the number of awards ...

  • Page 81
    ...organized on the basis of products and consist of Golf Clubs and Golf Balls. The Golf Clubs segment consists primarily of Callaway Golf, Top-Flite and Ben Hogan woods, hybrids, irons, wedges and putters as well as Odyssey putters, pre-owned clubs, other golf-related accessories and royalty and other...

  • Page 82
    ...ARB 51. Note 3. Investments Investment in Golf Entertainment International Limited Company During the fourth quarter of 2006, the Company made an investment in Golf Entertainment International Limited ("GEI"), the owner and operator of TopGolf entertainment centers. In connection with the investment...

  • Page 83
    ..., the option to supply golf balls for the TopGolf driving ranges, rights as the preferred supplier of golf products at prices no less than those paid by the Company's customers used or offered for use at TopGolf facilities, preferred retail positioning in the TopGolf retail store, access to consumer...

  • Page 84
    ... purchases of new clubs by growing the Trade In! Trade Up! program and to enable the Company to better manage the distribution of pre-owned golf clubs and the Callaway Golf brand. The FrogTrader acquisition was accounted for as a purchase in accordance with SFAS No. 141, "Business Combinations...

  • Page 85
    ... to improve the Company's business processes and reduce the Company's overall expenses (the "2005 Restructuring Initiatives"). The 2005 Restructuring Initiatives include, among other things, the consolidation of the Callaway Golf, Odyssey, Top-Flite and Ben Hogan selling functions, as well as...

  • Page 86
    ... charges related to severance and facility consolidations in connection with the Company's full integration of the Callaway Golf ball manufacturing with the Top-Flite golf ball manufacturing at the Chicopee, Massachusetts and Gloversville, New York locations. The Company recorded charges to pre-tax...

  • Page 87
    ... Statement Information December 31, 2006 2005 (In thousands) Accounts receivable, net: Trade accounts receivable ...Allowance for doubtful accounts ...Inventories, net: Raw materials ...Work-in-process ...Finished goods ...Property, plant and equipment, net: Land ...Buildings and improvements...

  • Page 88
    ... by major asset class: Useful Life (Years) December 31, 2006 Accumulated Net Book Amortization Value (In thousands) December 31, 2005 Accumulated Net Book Amortization Value (In thousands) Gross Gross Non-Amortizing: Trade name, trademark and trade dress ...Amortizing: Patents ...Other ...Total...

  • Page 89
    .... Note 9. Derivatives and Hedging The Company from time to time uses derivative financial instruments to manage its exposure to foreign exchange rates. The derivative instruments are accounted for pursuant to SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended...

  • Page 90
    ... based on quoted market prices or pricing models using current market rates, and records all derivatives on the balance sheet at fair value with changes in fair value recorded in the statement of operations. At December 31, 2006, the fair values of foreign currency-related derivatives were recorded...

  • Page 91
    ... open market or in private transactions, subject to the Company's assessment of market conditions and buying opportunities, up to a maximum cost to the Company of $50,000,000. In June 2006, the Company announced that the Board of Directors authorized a new $50,000,000 stock repurchase program, which...

  • Page 92
    ...the GST are accounted for as a reduction to shareholders' equity until used in connection with the settlement of employee stock option exercises, employee stock plan purchases or other awards. Each period, the shares owned by the GST are valued at the closing market price, with corresponding changes...

  • Page 93
    ..., restricted stock/units, performance units and other equitybased awards to the Company's officers, employees, consultants and certain other non-employees who provide services to the Company. All grants under the 2004 Plan are discretionary, although no participant may receive awards in any one year...

  • Page 94
    ...2006. The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model. The model uses various assumptions, including a risk-free interest rate, the expected term of the options, the...

  • Page 95
    ...through the Callaway Golf Company Grantor Stock Trust (see Note 11-Capital Stock). The actual tax benefit realized ...employee participants and directors during the years ended December 31, 2006, 2005 and 2004, as well as the related weighted average grant date fair value for each type of award (number...

  • Page 96
    ..., the Company amended and restated the Callaway Golf Company Employee Stock Purchase Plan (the "Plan") to eliminate the look-back provision. Under the amended and restated Plan, participating employees authorize the Company to withhold compensation and to use the withheld amounts to purchase shares...

  • Page 97
    ... income (loss), as reported ...Add: Share-based employee compensation expense included in reported net income (loss), net of related tax effects ...Deduct: Total share-based employee compensation expense determined under fair value based method for all awards, net of related tax effects ...Pro forma...

  • Page 98
    CALLAWAY GOLF COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Note 13. Employee Benefit Plans The Company has a voluntary deferred compensation plan under Section 401(k) of the Internal Revenue Code (the "401(k) Plan") for all employees who satisfy the age and service requirements ...

  • Page 99
    CALLAWAY GOLF COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) During 2006, 2005, and 2004, tax benefits related to stock option exercises were $839,000, $2,408,000 and $2,161,000, respectively. Such benefits were recorded as a reduction of income taxes payable and an increase in ...

  • Page 100
    ... estimates are updated over time as more definitive information becomes available from taxing authorities, completion of tax audits, expiration of statute of limitations, or upon occurrence of other events. In 2006, 2005 and 2004, the tax rate benefited from net favorable adjustments to previously...

  • Page 101
    ...claims against Acushnet Company for patent infringement. Specifically, Callaway Golf asserts that Acushnet's sale of the Titleist Pro V1 family of golf balls infringes four golf ball patents that Callaway Golf acquired when it acquired the assets of Top-Flite. Callaway Golf is seeking damages and an...

  • Page 102
    CALLAWAY GOLF COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) of Enron Corporation, as part of a comprehensive strategy to ensure the uninterrupted supply of energy while capping electricity costs in the volatile California energy market. The Enron Contract provided, subject to the ...

  • Page 103
    ... During the normal course of its business, the Company enters into agreements to purchase goods and services, including purchase commitments for production materials, endorsement agreements with professional golfers and other endorsers, employment and consulting agreements, and intellectual...

  • Page 104
    ... are organized on the basis of products and include golf clubs and golf balls. The golf clubs segment consists primarily of Callaway Golf, Top-Flite and Ben Hogan woods, hybrids, irons, wedges and putters as well as Odyssey putters, other golf-related accessories and royalties from licensing of the...

  • Page 105
    CALLAWAY GOLF COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The table below contains information utilized by management to evaluate its operating segments. 2006 2005 (In thousands) 2004 Net sales Golf Clubs ...Golf Balls ...Income (loss) before tax Golf Clubs(1,3) ...Golf Balls...

  • Page 106
    ... items represent unallocated corporate assets not segregated between the two segments. The Company's net sales by product category are as follows: Year Ended December 31, 2006 2005 2004 (In thousands) Net sales Drivers and Fairway Woods ...Irons ...Putters ...Golf Balls ...Accessories and Other...

  • Page 107
    ... use on products such as golf apparel, watches, travel gear and eyewear. The Company has a current licensing arrangement with Ashworth, Inc. for a complete line of Callaway Golf men's and women's apparel for distribution in the United States, Canada, Europe, Australia, New Zealand and South Africa...

  • Page 108
    CALLAWAY GOLF COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Note 19. Summarized Quarterly Data (Unaudited) 1st(3) Fiscal Year 2006 Quarters 2nd(2,3) 3rd(2,3) 4th(3) (In thousands, except per share data) Total Net sales ...Gross profit ...Net income (loss) ...Earnings (loss) per ...

  • Page 109
    ...CALLAWAY GOLF COMPANY CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 2006, 2005 and 2004 Allowance for Sales Returns Allowance for Warranty Doubtful Reserves Accounts..., net ...Balance, December 31, 2005 ...Provision ...Write-off, disposals, costs and other, net ......

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